Is management consultancy at the crossroads?

How has the consultancy industry adapted to life post-Enron and downsizing? Wilf Altman reports

Management consultants have come a long way since the days of the early pioneers – Frederick Taylor, Frank and Lilian Gilbreth, Arthur D Little and Ed Booz, and later McKinsey in the US and Urwick in the UK. In the last few years, demand for consultancy services, including IT and outsourcing, has been phenomenal, strongly fuelled by government departments and, especially, the National Health Service (NHS). Can the boom continue? Will a Brown UK government follow the Blair mantra of attempting to solve most problems by pushing through more legislation or higher spending, or both?

The surprise factor is that after the vilification of consultants post-Enron and WorldCom, Accenture has re-established itself rapidly and topped the league table in 2005, while all the Big Four accountancy firms (except Deloitte) having hived off their consultancy arms have now largely rebuilt them. Ironically, after showing many of their major clients how to downsize they did some significant downsizing themselves, and are now in competition with the small teams and individuals they fired.

Fee income by the leading 75 consultancies was £5.1bn in 2005, up from £4.7bn the previous year, according to Management Consultancy, the industry publication. The public sector accounted for £2.2bn expenditure on management consultants in 2005, an increase of 23% over the previous year. The NHS became the fourth largest market, adding £67m to reach £320m of the £2.2bn. Consultants’ fees are estimated at £942m. This doesn’t include some large outsourcing and implementation projects handled by other suppliers besides consultants, according to the Management Consultants Association, which speaks for 70% of the profession.

After the recent spending boom, where is future volume to come from? More public sector projects, manufacturing, financial services, outsourcing, transport or telecoms? Can there be much more to be tackled under the Government’s reform agenda? There is, plainly, a lot more to be done in the NHS – the fourth largest market for consultancy – if only, as one insider told me, to tackle some of the failures. But many parts of the NHS are improving. Missed targets and loss-making NHS Trusts don’t tell the full story.

Criticism

Management consultants clearly need to answer some serious criticisms of which the profession has been accused, such as merely replicating changes in some ministries and departments already carried out in others. In Plundering the Public Sector – How Labour are Letting Consultants Run Off with £70 Billion of Our Money, the authors, David Craig and Richard Brooks, reckon it will cost £20bn of taxpayers’ money on management consultants, and at least £50bn for IT systems consultants, to modernise the delivery of public services, a level of spending criticised by the House of Commons Public Accounts Committee (PCA) for apparent profligacy without being confident of the scale of likely benefits.

The PCA also criticised Customs & Excise for its use of management consultants, apparently spending £28m on 300 consultants between November 2001 and March 2003 without any clearly identifiable results. Craig and Brooks concluded that as new Labour progressed, and as thousands of millions were spent on consultant’s fees, the Government found that it was much harder than it imagined to get the results that all the management consultancy and huge new IT systems should have delivered. Management and IT systems consulting, according to Craig (himself a management consultant), is one of the most profitable businesses in the UK today.

To be fair, the UK Government has learnt to be more astute in its use of management consultants. The Office of Government Commerce’s ‘Catalist’ system approves selected consultancies, following a thorough pre-qualification process, and encourages the wider use of smaller consultancies and providers of interim managers. There is increased pressure on practices operating in the public sector, as Lynda Purser, director of the Institute of Management Consultancy, points out, ‘to take substantial risk against a successful outcome through risk/reward contracts’. ‘The focus on delivering Gershon’s efficiency targets and the transformational approach to change in the NHS has meant heavy investment in consultancy – more online form filling and fewer civil servants.’

‘You can’t knock the role of big brands in consultancy,’ one leading consultant told me, but more organisations are finding that there are alternatives – smaller and medium-sized consultancies with more experience. Many smaller practices offer a stronger value proposition. Today, even big clients are opting for smaller consultancies offering service, skills, sector and functional knowledge. This is unlikely to cause too much concern to industry leaders like Accenture, IBM Consulting, Xansa, Deloitte, Capgemini, LogicalCMG, PwC, Capita and PA Consulting, which can pitch for and win large projects that cannot be handled by smaller and medium-sized practitioners.

What should concern big brands is that, in 2005, as the MC Survey showed, growth of 9.6% was at a much lower rate than in 2004, and both growth and income in 2003 were stagnant.

Another problem facing consultancies capable of handling very large projects is the kind of situation that has confronted Accenture, which is understood to have walked away from a £12.4bn NHS IT contract in north and east England after racheting up huge losses, transferring the work to Computer Sciences Corporation and sacking the major software suppliers. Accenture announced aggregate NHS losses of £75m for 2005 and expects to make further losses. Could Accenture have been liable for significant penalties had it not reached a swift settlement?

Future prospects

Management consultants have had a field day, or rather, several years of super growth. Can it last? There must be question marks about future levels of business from the public sector, especially the NHS. Can other key markets like financial services yield more consultancy projects, following the demand from banking, especially institutions needing consultancy on compliance, Sarbanes–Oxley and Basel II? Manufacturing has been a profitable source of business and should be seen as a national challenge. The UK cannot compete with low cost Asian manufacturing, but it still has quality production which can benefit from strategic advice, operational efficiency improvement and change management. Some of the big multinational corporates must constantly need to improve their performance and more smaller and medium-sized businesses will look for help to achieve profitable growth.

If recent growth patterns in the management consultancy market slow up, some serious restructuring seems unavoidable, coupled with the kind of shakeout seen only a few years ago when the Big Four had to dispense with consultants only to re-employ them again. Many smaller and medium-sized consultancies will grow without the overhead cost of recruiting large teams, but by using relatively new services such as Mindbench, which has some 4,000 consultants on its books. Individuals or teams can be called in to fulfil project requirements to enable consultancies to remain agile. New small specialist practices will make their mark and insiders predict more mergers among the growth-minded and ambitious 50% of consultancies which employ less than 100 people.

But can the profession count on year-on-year double digit growth? The more optimistic have few doubts. The pessimists point to key markets for consultancy, which have learnt some valuable lessons from consultants and appointed or strengthened their own internal teams of consultants, rather like internal auditors.

Wilf Altman is a business journalist.